The euro (FXE) has been one stubborn currency. The short euro trade taught me and reminded me to be patient, to stay focused on the underlying thesis until it is proven wrong, that currency markets get distracted all the time and very easily, and that currency markets prefer to make life difficult for central bankers by forcing action over words.
In several posts toward the end of last year and starting this one, I pegged the euro as an ideal short to start 2014. This was a carryover of euro-bearishness that has grown over several months, and I still think the euro is very over-valued.
Against the U.S. dollar, the euro dropped about 1.9% for the month of January. It performed "less bad" than the S&P 500 (SPY) which lost 3.6% in January, but it was one of the weakest currencies of the month. Only the Australian dollar fared worse of the major currencies I follow. So while the euro has performed much better than I expected, at least on a relative basis I did capture the weakness I was seeking.
The chart below shows why I consider the euro so stubborn. All the losses for January occurred on the second trading day of the year (January 2) and the last three trading days of January. In between was a lot of churn with a roller coaster swinging me from feelings of validation to defeat. In particular, the surge on January 23rd made me feel like I had lost a good opportunity to finally take some profits. At that time, the PMIs for France, Germany, and the aggregated eurozone printed slightly higher than expectations. The rally was sort-lived as the short attention span of the currency markets quickly shifted to wrangling over prospects for the U.S. Federal Reserve's meeting the following week.
The euro is down for the year but only after a lot of churn
Note that even after the euro's loss in January, the currency still remains above its level when the ECB (European Central Bank) cut interest rates in November. The euro is still benefiting from anti-U.S. dollar bets, and I think there is also an eager willingness to price in victory for the ECB. Yet, on Friday, eurostat reported that it expects January annualized inflation to drop to 0.7% from December's 0.8% reading, one step further away from the ECB's near 2.0% target. Also on Friday, eurostat reported, yet again, no progress in eurozone unemployment which stayed perched at or near record highs through all of 2013. With the currency and economic data remaining so stubborn, the ECB will likely need to resort to ever more extreme measures in coming meetings to try to turn the tide.
Euro unemployment remained at or near record levels throughout 2013
After the euro's drubbing to end January, I took profits by closing out my relatively large short EUR/USD positions. I still have very small positions net short the euro in other major currencies. Going forward, I will look to fade EUR/USD rallies and take profits much more quickly when/if they appear. Financial markets seem to be getting more volatile, so I expect multiple opportunities for these kinds of quick fades in the comings days and maybe even weeks. The next potential pivot point for the trading strategy will come at the ECB's next meeting on February 6.
Be careful out there!
Disclosure: In forex, I am net short the euro. I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.